Oceňování 2020, 13(3):18-24 | DOI: 10.18267/j.ocenovani.251

Theoretical review of capital structure theories

Hoang Long Pham

Ing. Hoang Long Pham, Ph.D., asistent; Katedra financí a oceňování podniku, VŠE Praha

This article describes the best-known theories related to the capital structure topic. Since the publication of the Modigliani and Miller's (1958), the theory of capital structure of firms has been a study of interest to finance economists. In the paper, we will describe three main theories of capital structure, which diverge from the assumption of perfect capital markets under which the MM model is working. The first is the Trade off theory. The trade-off theory is the trading-off the benefits of the firm with cost of debt and equity. It means that companies try to find "optimal" capital structure to have a best combination of debt and equity. The second is the pecking order theory, which states that the company follows a hierarchy of financing (internal financing, debts and, last but not least, the issue of securities) in order to minimize problems with information asymmetries between managers and shareholders. In 2002, Baker and Wurgler came up with a new theory of capital structure: "Market Timing Theory." This theory states that existing capital structure is the cumulative result of the firm's past experience, which it had attempted time to time under equity market.

Keywords: Capital structure; Pecking order theory; Trade-off theory; Market timing theory

Grants and funding:

Článek je zpracován jako součást výzkumného projektu Fakulty financí a účetnictví VŠE Praha, který je realizován v rámci institucionální podpory VŠE IP100040.

JEL classification: G30

Published: December 28, 2020  Show citation